Even before the first wave of the global financial crisis in 2007, local currency markets were a popular, if niche, option for certain borrowers.

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Big funders, such as corporates and agencies, liked the investor diversification they offered outside mainstream markets while more opportunistic issuers sought arbitrage opportunities relative to their home markets.

Investors were attracted by the high coupons – often in double digits – offered by bonds denominated in the currencies of economies with high interest rates, especially when issued by the top-rated borrowers most active in the sector.

These factors are all still at play, but the eurozone financial crisis is spurring issuance, according to bankers in the market.

Paul Johnson, head of syndicate at Royal Bank of Canada, said: “Some non-core currency business over the past 12 to 18 months has been driven by a flight to quality, particularly from the eurozone.

Whether it’s the Aussie dollar supported by the strong commodity environment or the Canadian market underpinned by a strong economy and banking sector, these are attractive propositions weighed against extreme volatility elsewhere.”

Fistful of fives
The five most active non-core currencies for international issuers this year are Australian, Canadian and New Zealand dollars and Norwegian and Swedish kroner, most of which have seen strong improvement in bond issuance from foreign entities.

Year-to-date issuance by international borrowers in Norwegian kroner is $16.6bn, up from $5.5bn for the same period in 2009.

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For Canadian dollars, the latest figure is $18.6bn compared with $4.1bn for 2009; for New Zealand dollars it is $6.5bn this year compared with $4.9bn; and for Swedish kronor $10.3bn compared with $3.7bn.

For Australian dollars the numbers are $41.1bn and $24.4bn, although unlike in the other currencies, there has been a year-to-date decline in volumes since last year.

Typical issuers are large supranationals such as the European Investment Bank and KfW or well-rated corporate issuers, such as Nestlé, General Electric and the big carmakers such as Toyota and Volkswagen.

According to HSBC, outstanding issuance from five key non-Australian agency borrowers, for example, totals more than $60bn, which is more than half the $112.9bn total value of both domestic and international bond issuance in the currency last year.

Chris Jones, global head of local currency syndicate at HSBC, said participants have a variety of reasons for issuing in local markets.

“Issuers can either take a tactical approach to the market, identifying currencies that offer them a funding arbitrage versus the G3 currencies, or treat local currency markets as diversification. A big and deep market could be a core funding tool and some may even pay a premium to enter the market,” he said.

Similarly, there are three different classes of investor, he said. Local investors such as pension funds and insurers that need paper in their home currency; other investors benchmarked against an index that requires local currency exposure; and a third more speculative class. They could be “hot money” such as hedge funds, or retail investors seeking a yield pick-up against G3 currencies.

Better yields than those available in the big benchmark currencies are a feature across local markets. RBC’s Johnson estimates that Australian dollar-denominated paper delivers yields of between 3% and 3.5% more than equivalent deals in US dollars.

Canada, though less noticeable as a high-yielding market, offers a 1% pick-up at the short end of the maturity curve over dollars, while deals in Norwegian kroner offer excess returns of 1.5% to 2% and those in Swedish kronor offer 1% to 1.5% over euro-denominated trades.

In more risk-hungry markets before the crisis, very high-yielding currencies such as the Turkish lira, which offered coupons well into double figures, were popular.

Lower risk

Now, investors seek safer assets such as those denominated in the currencies of strong commodities-backed economies, which because of their higher interest rates still offer more attractive yields than mainstream markets.

Five-year credit default swaps on Norway and Sweden, for example, were quoted at 22 basis points and 29bp last week, far below France, which was at 98bp and even Germany – Europe’s safe haven – which was quoted at 48bp.

RBC’s Johnson said: “The Norwegian krone market has always had the added safe-haven status conferred by having only voluntary public debt and is one of the tightest countries in the world in credit default swap markets. It’s also tended to be a proxy for oil. The Norwegian krone has been the perfect retreat in a storm.”

Asian investors are also making their presence known. Paul Eustace, head of syndicate at TD Securities – currently the top bookrunner for local currency market issuance – said demand is split between investor types for the two main issuer groups, triple-A rated agencies and their high-rated corporate counterparts.

He said: “A lot of initial institutional interest comes from the Far East. Asian central and private banks and real money in Japan. These investors look for the better-rated agency deals and are less involved in corporate issues.”

Eustace said: “Corporates in all currencies are much in demand currently. Investors are nervous about governments and quasi-governments, especially in Europe, and as a result they are more focused on corporate borrowers because their financing needs are much more finite.

They’ll follow them into the non-core currencies as well.”

• The issuer: Rabobank

Before the sovereign crisis hit, many banks were enthusiastic issuers in local currency markets, a function of the large-scale funding required to support their lending activities.

Now investors in the market largely shun financial issuers due to their correlation with the continued weakness in government markets and the period of recalibration the sector is enduring.

One bank, however, retains market access due to its safe-haven status: the Dutch mutual Rabobank, which is primarily focused on food and agricultural financing and escaped the consequences of the financial sector’s meltdown of 2007 and 2008.

Sjaak-Jan Baars, vice-president in long-term funding at the bank, said: “We’ve built a strong name with European retail investors in the local currency markets. Increasingly they want to diversify away from the mainstream currencies but without taking credit risk, so our strong rating helps.”

The bank may have lost its coveted triple-A rating from Moody’s and Standard & Poor’s during the sovereign crisis, but it remains one of a select group of financial institutions to boast a clean sweep of AA ratings from the three main rating agencies.

While a popular and regular issuer in large size in core currencies, in local markets the bank benefits from the desire of domestic investors to diversify away from local borrowers while still receiving products denominated in their home currencies. This is especially true in Scandinavia, said Baars.

He said that local currency market issuance for the bank has increased proportionally. Demand in those currencies has remained static between €5bn to €6bn, but Rabobank’s total funding need has declined. In previous years the bank has raised €40bn a year but so far in 2012 its total is €25bn.

According to Dealogic, it has raised €5.7bn so far this year in Australian, Canadian and New Zealand dollars, Norwegian and Swedish kroner, Turkish lira, Russian roubles, Swiss francs and South African rand.

Baars said: “The beauty of being active in these markets as an issuer is that there is always a currency that’s in good demand.

Previously, the high-yielding currencies such as the Turkish lira were in demand, now people look for a safe haven, such as commodity-rich countries such as Norway. The story might change but you always end up with the same amount of total funding.”